Tax reform favours apartments and owner-occupiers

If this goes ahead, properties where owners have opted to not pay the land tax will sell at a premium in the future. Simple maths. So many already work out how to find the 20% deposit to avoid paying mortgage insurance. On going payment of land tax on principal places of residence would force older people with low incomes/pensions out of their family homes to old age homes which have mixed reviews for value and quality. Not sure about the rest of you but I prefer to be within a community of mixed age groups. This tax reform will be another age discrimination event.

If their aim is to increase housing density to reduce infrastructure costs (which I agree they need to do), this reform must be delivered alongside changes to the LEPs. Floor area ratios have been decreasing over the last 20 years. Dual occupancy is not encouraged. If they want higher density make it possible without having to go to the housing commission. Let older people continue to live in their homes but share/rent out part.

In reply to Julie Myers, the proposed Land tax wouldn't affect current houses with elderly occupants but will do future owners who buy choosing the ULV method. Allowing greater land use in LGA zones should be a consideration for house purchasers. In all I see it as a " pay day " loan tax scheme get paid now but you'll be paying forever! Only winner is the government and apartment builders.

The so called tax reform of replacing stamp duty with an annual land tax is in fact sovereign theft. Brings to mind a quote by ex American president who is now deceased, Ronald Regan" Any time a government official or politician says they are there to help you, just make sure your backside is against a brick wall"

Let us assume the legislation is adopted. Is it fair to say that any and every single dwelling home that has sufficient unimproved land cannot be refused subdivision approval to develop said land. surely if this were not the case then single dwelling home and land owners would be discriminated against.
If the object of the exercise is to get more people into their own homes why not remove the benefits bestowed on the greedy multiple investment property owners. Own your own home and have one investment property (be it house or apartment) that is tax deductible after that they pay in full for any benefit they achieve.

Replacing a bad tax like stamp duty with an even worse tax is not tax reform. Look what happened in the ACT when stamp duty began to be phased out 10 years ago. Sine then rates based on land values have gone up 300%. Everyone in my street now pays over $8,000pa in rates. The local goverment also collects more in stamp duty than it did 10 years ago. Of course the Property Council and real estate agents benefit because less stamp duty means more can be paid up front by the buyer for the house and so selling commissions are higher. Overall, property owners come off much worse because there is no escaping the now annual 9-11%pa increase in rates on your home. Unless your income is going up by the same 9-11%pa your living costs are rising faster than your income and your budget will suffer. NSW, don't do it.

Why do we still have charts comparing property prices to shares? Share price charts show all capital and market movements. Property price charts exclude contributed capital like redevelopment and renovations and ignore not insubstantial holding costs of rates, insurance and maintenance. It distorts everybody’s understanding of what is really happening.

Ps good article, I was unaware of the bias in the policy towards units and against investors.

Graham,
Any idea about the effective date for this reform?
2022 or earlier?

Looking at the forest rather than the trees, developed-country Governments are addicted, or politically forced, to become big spenders (covid-relief now, climate change & wealth equalisation next). QE/MMT (money printed bond buying) is funding the gap now, but one day the printing presses will run out of ink, so to speak. Then it is back to more taxing. Sadly I think it is inevitable to expect more asset taxing like this, maybe a death Estate Tax or maybe an alive Net Worth tax (latter already applies in Switzerland). At the moment 20% of income tax payers fund the 60% who don't pay income tax. The income tax base is too narrow and getting demographically narrower with an aging workforce. Property taxes are a state tax. An alive or at death wealth tax probably is a Federal Tax. It will be interesting to see how each fight for the right to tax assets, including how long with the Federal Government reduce its tax take by giving deductions for state land taxes? In short, this is innovative, but the design of this is not finished and I imagine one day all properties, and probably all assets, in all states and Federally will be annual value taxed. Its a hard call to say on your next purchase elect stamp duty, because the annual tax will only increase; or elect the annual increase because having paid stamp duty, an annual tax will come anyway? The root of this problem is increased Government spending which the electorate doesn't seem to care much about these days.

My understanding was Death Duties were a State not Federal Tax.
Is it expected the Federal Government would take this prize.

This is pretty scary but not unexpected. Governments have been haemorrhaging cash during the pandemic and racking up huge amounts of debt. Property values are soaring so land tax "reform" is an obvious opportunity to raise more revenue. Thing I don't like about land tax is that (unless you are an investor) there is no underlying cashflow to fund the payment of the tax by the property owner. I own a holiday shack which has gone up in value due to the low interest rates and probably the pandemic too so I'm expecting a land tax hit. You could say that I'm richer due to the value appreciation but its just on paper. I have no intention to sell. Same goes for the primary residence. It's gone up in value but it's our home so we're not going to sell it.

I think the solution to this particular problem is to more accurate reflect the cost of providing services to an area increases based on the occupancy. To this end, the land tax should be increased by 20% for each additional "occupant" of the land, that is, for example, for each apartment built after the first one. This would mean that apartment owners will still pay their fair share of land tax at a minimum of 20% of the amount a house owner would pay.

This policy is so compromised, it seeks to implement multiple objectives. Raising state revenue and also implementing a land use bias and favouring a particular type of buyer. It distorts the market and may result in socially undesirable and unpopular results. eg. High density housing is currently out of favour in the covid pandemic. Home schooling encourages demand for houses with more space. Lockdowns encourage demand for back yards.
This looks like the property industry in NSW has drafted this policy. Undue influence?
Like all policies with multiple objectives it is a compromise and will not optimise outcomes. At the very least it will distort the market with medium and long term consequences and costs which will be difficult if not impossible to unwind.
It is likely to encourage investors to move capital across state borders seeking a more favourable tax regime. This flight of capital is seen overseas. eg. The US where people move between states and districts based on property taxes.

The NSW Government would be wise to seek broader advice that it appears to have at present.

For an example of the phasing out of stamp duty in Australia please research the experience in the ACT. Yes stamp duty receipts are roughly level since 2012 but the ACT government’s tax take has more than doubled since then. Rates have gone up well above inflation. The increase in rates is unrelated to the underlying costs of providing services normally associated with rates and acts as a de facto land tax on all property owners in the ACT. Although rates are a local council responsibility in NSW I suspect the same will happen here. It is just a tax increase passed of as “reform” that favours vested interests.

I think what also can't go without saying is that this provides a smoother, annuity style income for the state government. It won't have to deal with the swings and roundabouts of the property cycle. Some of the biggest costs to the state government are hospitals, education, transport. Being able to rely on guaranteed funding I think will be a good thing.

Do I understand correctly, please?
Will I have to pay Land Tax on an existing fully owned house property?
Is my existing home exempt from Tax because I paid Stamp Duty when I purchased it?
If a property is purchased under the proposed tax changes and the buyer elects the Land Tax option does that mean that property will be forever classified as paying Land tax regardless of how many times it changes hands?
Thanks

Hi Brian, so this is a proposal at this stage, but if adopted:
1. No, you will not receive a new land tax bill on your existing home, this is only for new purchases after adoption.
2. Yes, once any buyer elects the land tax option, the property will forever retain this treatment.

Thank you

Graham, I am no friend of big developers but even I would not accuse them of such outrageous profit margins. If a block of 200 apartments has an average unit value of 2 million dollars and the construction and marketing costs averaged across 200 units is certainly well south of half a million then I suggest that is the explanation why Harry Triguboff is so rich.
I am not a quantity surveyor but my guess is the the land value in the average unit in your example would be more than $500,000 thus levelling the playing field for owner-occupiers..

Hi Ron, Thanks for the comment ... I didn't say the average apartment cost was $2 million, I said assume there is an apartment worth $2 million in a large building. In a large building of say 200 units, there may be a one-bedder on the first floor worth $500,000 all the way to a four-bedder penthouse worth $5 million (or if it is Crown at Barangaroo, $20 to $60 million). The total value of the land is allocated according to unit entitlements (size), giving the penthouse the biggest bill. So my example is an apartment somewhere in this building worth $2 million with $100,000 of the total land value allocated to it. Every building is different but this is typical in my experience of owning a few apartments.

Ron, both you and Graham are a long way off the mark. The average land value per unit on a 200 site is $45-$50k.

Thanks, Dt. So Ron is saying I underquoted and your are saying I overquoted, so I might be about right. But bowing to your knowledge, then it makes my point even stronger.

Hi Dt,
You sound confident. Perhaps you could solve a long standing mystery for me and reveal what the construction cost of an average unit in the hypothetical 200 unit development with a $45-$50k per unit land cost in an average suburb and with what selling price. Thanks.

Ron - the cost of construction of most multi-unit developments has remained at $3,000 per sqm for some years though it may be a tad higher of late with recent, though possibly transitory, input price increases. There are other costs like funding, permits, legal etc. The land underneath is the major variable, as well as the price people are willing to pay for the finished article in low interest rate conditions like these. People will pay $12,000+ per sqm in Sydney, and it’s not uncommon for prices nearer $20,000 psqm in well located areas.
Hence, there’s a lot of money being made by well organised developers in this market.

Just remember, whenever the government proposes "tax reform" remember it means that you will be paying more tax (in the long term). The government likes tax reform that it can sell as a tax reduction, but remember it will always mean us paying more tax

Great thoughts Graham.
The proposed property tax appears likely to be tax deductible for investors so they won't mind the relative higher tax to owner-occupiers as much.

However, ULV is likely to increase in the long term and hence property taxes will likely increase although the tax includes a proposed cap on the annual increase.

If a purchaser had enough money for the transfer/stamp duty but chose the property tax, it could be worthwhile investing the difference in the first year and the property tax could be paid by the investment returns.